Careful What You Say

Is Canada talking itself into a housing crisis?

Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of
Maclean’sand other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.

Consider affordability. The Bank of Canada’s housing affordability index shows that newly built standard houses are as affordable as 10 years ago. And the Royal Bank of Canada’s affordability indexes for existing housing only “exceed their long-term averages modestly, although the national figures are exaggerated by extremely poor affordability in Vancouver.”

Moreover, credible analysts don’t see a U.S.-style crash. Professor Robert Shiller told CBC News in September that Canada should be spared because its banks have low subprime exposure. And Gluskin Sheff economist David Rosenberg wrote in a November note “that the U.S. plunge five years ago followed years of credit-tightening moves… anyone think that [the Bank of Canada] is going to raise interest rates 450 basis points with inflation barely above 1 per cent?”

Yet, some media sources are now painting a dire prognosis for Canadian housing. It brings to mind the 2012 paper, “What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets,” written by Mr. Shiller and co-authors, Karl E. Case and Anne Thompson.

The paper looks at press coverage leading up to the U.S. housing collapse and documents the increasing frequency of articles depicting U.S. housing as a bubble. June of 2005 was particularly busy, with cover stories in the
Economist, Barron’s,and
Time Magazine.

Mr. Shiller and co-authors argue the prominence of the bubble theme produced “a turning point in public thinking” that led to prices turning down, beginning in 2006. A similar point was made by Mr. Shiller in a 2006 paper, in which he wrote: “there are reasons to suspect that the price changes … are related to public swings in opinions rather than fundamentals.”

Could Canada similarly be talking itself into a housing crash (possibly followed by a financial crisis and years of stagnation)? Or will the fundamentals usher in the soft landing that the federal government is trying to achieve through tighter mortgage rules? Messrs. Shiller and Rosenberg believe the fundamentals will win because the Canadian setting is more supportive. Let’s hope so, if only so that Canadians are spared the trauma Americans have experienced.

READERS:Do you see signs of a crash? Or do you just hear the talk and worry?